How High Can Sea Limited Stock Go?

Singapore-based internet retail powerhouse Sea Limited (NYSE:SE) is eyeing expansion. But does it have what it takes to achieve world domination like some of the popular online entertainment and retail giants?

Investors are sitting on a 118% gain over the past five years, but have also suffered a calamitous decline of almost two thirds of the value of the stock since the heady days of 2021.

To highlight the volatility, this year alone, SE share price is up by 96% year-to-date so how much further can it go? 

3 Strings To Sea Limited’s Bow

Sea Limited has three primary segments. Garena is the gaming segment with a presence in Southeast Asia. Its flagship game is Free Fire, a multiplayer battle royale interaction, largely competes with big names like PUBG and Fortnite.

Sea Money is the firm’s mobile wallet, credit and payment processing offering. The digital financial services provider has a presence in Southeast Asia and Taiwan.

Lastly, the e-commerce offering, Shopee, is the largest pan-regional e-commerce platform in Southeast Asia and Taiwan and also has a presence in Latin America. 

Why Did Revenue Growth Slow?

Since its IPO in 2017, the company has managed to grow revenues consecutively with each passing year. The yearly growth rates have been nothing short of impressive.

The company had sustained a close to or triple-digit year-over-year growth till FY2021. Over the past two fiscal years, there has been a slowdown in the pace. Between fiscal years 2021 and 2022, revenues grew by 25.1%, while between 2022 and 2023, this growth slowed to just 4.9%.

The answer to the slowdown can be traced to the digital entertainment segment. Prior to 2020, it was the main revenue driver while Shopee, was relatively new back then.

In 2017, digital entertainment accounted for 88% of Sea’s total revenue but since then this share has rapidly declined. In 2023, digital entertainment accounted for only 17% of its total revenue.

Moderation in sales was caused by declines in digital entertainment revenue for two straight years. This decrease was attributed to poorer user monetization. In Q1 FY2024, this segment also exhibited relative weakness, posting a 15.1% top line decline from the prior year’s period.

In stark contrast, Shopee’s popularity has only grown. As of 2023, this segment made up 75% of the total revenue. In the last quarter also, the e-commerce segment’s top line grew by 30.6% to $2.95 billion.

Last year, Sea Limited achieved the first full year of profit since its 2017 IPO, posting a net income of $162.68 million, a tectonic shift that is forecast to persist.

What Is The Future For Sea Limited?

Sea’s growth driver at this point is Shopee. In 2023, it was the fourth-most downloaded shopping app. The company enjoys a strong user base in Indonesia and enjoys significant user engagement during Ramadan. In the last quarter, Sea’s e-commerce gross merchandise value (GMV), revenue, and orders all posted quarterly records.

Management is trying to enhance operational efficiency in this segment through improvements in its logistics service and reducing costs. Shopee entered into the Brazilian market in 2020 and this year opened its tenth distribution center in the country.

Price is a key area of focus this year given that TikTok Shop’s heightened seller fee offers possibly a gap in the market for Sea Limited to capture share with lower-priced offerings.

With respect to the Garena segment, digital entertainment booked more active user count and enjoyed an uptick in the paying user ratio last quarter. So, despite top line weakness, user engagement is growing.

As user experiences remain central, the company launched Chaos, which is a major version update that allows players to vote for key events in the game setting.

The Indian Government banned Free Fire a little over two years back amid a ban spree of Chinese apps, which was a setback because the game was very popular in the country. In response, Sea is thinking of launching new India-themed games.

How High Can Sea Limited Stock Go?

Analysts calculate that Sea Limited stock can go as high as $78.36 per share, implying 6.2% upside from current levels.

In spite of the relatively limited upside assessment, analysts do seem to be swaying more positive with 4 analysts upgrading their earnings estimate over the coming quarter.

It’s noteworthy that a discounted cash flow forecast analysis is much more optimistic over a 10-year time horizon and places fair value at $92 per share.

Another important fact favoring Sea Limited bulls is that the balance sheet is cash-rich with almost $5.4 billion in cash and equivalents. That compares favorably with $2.89 billion in long-term debt.

At this point in time, it seems like much of the good news for the year has been priced in so a pullback may be warranted before the reward to risk ratio is a bit more compelling, at least when viewed through a valuation lens.

The high price-to-book, EBIT and EBITDA multiples all support the thesis that for now the risks are elevated. Even the PEG of 10x suggests that earnings growth is not going to catch fast enough to support the sky high price-to-earnings ratio of over 1,000x. 

The bottom line is Sea Limited has all the potential in the world to be a long-term, game-changing stock in most investors portfolios but a better entry point may lie up ahead.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.